The macro outlook for India remains challenging amid global uncertainties, slowing domestic growth and concerns over certain sectors. There’s unlikely to be any real pick-up in the next 12 months and the reforms put in place by the government have been disruptive, albeit we expect the short-term pain will produce long-term gains. It’s a tough environment that has its advantages, however, both for the trust and for certain types of companies in India.
My most recent visit – which took us to Bangalore, Delhi, Chennai and Mumbai – was particularly informative because companies tend to be much more realistic when the outlook is challenging.
But it was clear that the market remains structurally attractive over the long term and that there are strong companies that will get stronger with each cycle.
We have been able to find companies able to take advantage of the current challenging environment to consolidate their markets simply by doing better than their competitors. Some are also benefiting from a flight to quality.
Real estate offers a good example. This is a very difficult sector to be in currently, with a glut of uncompleted projects that has contributed to excess housing supply. But there is a positive theme emerging. While many developers are unable to secure funding, there is still strong demand for those real estate companies with a good reputation for completing high-quality projects.
With the competition struggling to deliver, there has been a flight to quality companies such as Prestige Group and Godrej Properties, which have good balance sheets and cash flow and are finding opportunities to buy better assets for cheaper.
A similar theme is developing in banking, where those in strong positions in retail continue to deliver higher than industry growth. India’s biggest retail lender, HDFC Bank, is benefiting from structural consolidation in the housing and real estate sector. It is also taking advantage of opportunities in the corporate lending space, now that there are fewer banks willing or able to compete.
This environment has been good for the trust in terms of positions. The trust is overweight in consumer staples, banks and life insurance and we’ve been adding to real estate, but we’re still very selective in infrastructure and businesses dependent on the corporate cycle.
All but one of our holdings are private sector enterprises. We have minimal exposure to the index-heavy energy sector as we don’t hold Reliance Industries, which has diversified out of its core petrochemicals and refinery businesses to invest heavily in the telecoms and retail sectors.
Instead we will continue to focus on the quality of management teams and look for companies with strong balance sheets and that have a good track record of navigating difficult cycles.
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These can be obtained free of charge from www.newthai-trust.co.uk or by writing to SL Capital Partners LLP, 1 George Street, Edinburgh, Scotland, United Kingdom, EH2 2LL.
Kristy Fong is Investment Director at Aberdeen New India Investment Trust.